Value the interest -rate swap by relying on the LIBOR and OIS rates

The fixed rate on the interest rate swap for the period of nine months,3 quarters is 2% against three months London Interbank Offered Rate (LIBOR). For the frequent settlement, the swaps are tied to three months London InterbankOffered Rate. In addition to this, it is being assumed that the day-count convention is 30/360.

In order to determine or calculate the fixed rate leg and to value the interest rate swap using LIBOR, the notional principle swap is taken $100 million. The time period required for the maturity of the swap is 9 months which is then split into 3 quarters, each three months. Or it can be said that the interest settlements are quarterly in nine months. The fixed rate is 2% against three months LIBOR rate. In addition to this, 30/360 day count convention is being assumed as well.

Using both London interbank offered rates (LIBOR) and Overnight indexed swap (OIS) rates, the interest rate swap are being valued as well as discount factor is also calculated for 3, 6 and 9 months under each calculations using LIBOR and OIS rates.The three month LIBOR rate tends to earn the interest rate which is equivalent to the 16% and for semi annually it is 45%.

The discount factor calculated for the valuation of the interest rate swap is 0.9852. In addition to this, the fixed leg is 2% for valuation of the interest rate swap using LIBOR and OIS. The discount factor under LIBOR and OIS are tabulated below;

Discount factor Interest rate swap using LIBOR Interest rate swap using OIS
3 months 0.995024876




6 months 0.99009901




9 months 0.985221675





Afterwards, the discount rates are calculated in order to calculate the cash flow using these discount rates under separate or individual valuation of the interest rate using OIS and LIBOR.

The total cash flow after using discount rates of LIBOR is 150745652.9; on the other hand, the total cash flow of notional amount using OIS discount rates is 164805577.2

The differences are found in the calculation of the valuation of the interest rate swap using LIBOR and OIS, which shows that by using LIBOR as the rate which indicates to lend the money for a specified period of time to other banks. On the other hand, the difference arises because of the use of overnight rate on the derivate contract.

The expectation of the market is measured through using OIS rate of the overnight funds. The risk in the OIS market is very minimal or avoidable due to no principle exchange, as well as funds are tend to be exchanged at the contract maturity or it can be stated that when one party of the contract pays another party net interest obligations(Thornton, 2009).


Collateralized contract and counter party in the valuation of interest rate swap

An interest rate swap is the promise of the exchange of the interest receipts made in the future. The parties mutually involved in the agreement of the interest rate swap agreement is known counterparties altogether.The valuation of interest rate swap depends on the counter party interest………………….

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